Capital letter July'13 - Fundsindia

Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.

Greetings from FundsIndia!

Last month marked the 20th anniversary of the "real" Indian mutual fund indus-try. It was in 1993 that private and foreign mutual fund companies were allowed to setup operations and offer mutual funds to investors. Over these 20 years, although the industry has grown steadily in terms of the assets under manage-ment, growth in the retail segment has been less than desired.

Various commentators have made observations along these lines in the past few weeks - praising the mutual fund industry for creating products that are transparent and delivering good performance, but chiding it for its lack of focus on increasing its retail client base. Writing in Business Standard, long-time veteran, Dhirendra Kumar, observed that mutual funds are presently a product for people who understand them and actively seek them out. He writes that "...while the fund industry has been busy earning its daily bread from easy-to-sell products...the government has focused more on mak-ing funds safe and less on encouraging people to invest.”

I would choose to look at it positively. The foundation of any sound industry is the presence of good products that deliver value to its customers. In this regard, the mutual fund industry has indeed de-livered on its promise. As a recent CRISIL performance study noted, a good majority of mutual fund schemes have consistently delivered above-market returns for reasonably long-term investors (you can read Vidya Bala's summary of this study here). Along with performance, mutual funds have also delivered on convenience, risk mitigation, transparency, and, over time, low cost of investing.

Given these, I feel there are reasons for optimism for the future of this industry. If there is some regulatory stability and even a mar-ginal easing of KYC regulations, investors will find it less onerous to enter the world of MF investing. Once they are in, the flexibility and performance of this channel will keep them there.

Twenty years from now, hopefully, we’ll find mutual funds as the preferred investment destination for investors in India.

If the product is here, can the market be far behind?

Happy Investing!

06—July—2013

Volume 5, Issue 07

Inside this issue:

A twenty-year o ld industry—Sr ikanth Meenakshi

1

The month ahead - Equity recommen-dations - B.Krishna Kumar

2

Balanced Funds: The best of both worlds - N imesh Shah

4

F inancial Planning Educat ion Ser ies

6

IIBs f latter, only to Dece ive—VRO

7

A twenty-year old industry

Srikanth Meenakshi

*Please note: Comprehensive financial planning is a fee based service

https://www.fundsindia.com/content/jsp/advisor/FPAppointment.do?prcsMthd=lndPg&utm_source=FIemailcapital

http://www.fundsindia.com/blog/mutual-funds/the-crisil-amfi-mutual-fund-performance-index-says-it-all/2918


The month of June was not particularly good for the stock and the forex market. The sentiment for the Nifty and the Rupee was negative in June with

the Rupee edging past the Rs.60-mark against the US Dollar. The persistent selling by the foreign institutional investors in the equity and bond market

had a bearish impact on the Nifty and the Rupee.

The Nifty behaved in line with our expectations and hit the support zone at 5,650-5,700. The index has subsequently staged a sharp recovery in the past

few trading sessions. Fundamentally there is nothing much to cheer from a macro economic perspective. Except for some improvement in the current

account deficit for the last quarter of the previous fiscal, the macro-economic condition remains worrisome.

While the headline inflation has eased in the recent months, there are no signs of easing as far as the consumer price inflation is concerned. The steady

hike in the diesel price and the sharp hike in petrol price in the past few weeks would also stoke inflation.

Apart from the slide in the Rupee, the price of crude oil is also on an uptick. This is not a welcome development from a macro-economic perspective.

The only positive sign is the slowdown in the gold imports and the softening of the gold price in international market. Given the steps taken by the gov-

ernment in the recent months to curb gold imports, there could be some relief to the current account deficit in the forthcoming months.

With the dawn of July, the corporate earnings season would also get underway. While the expectation from the corporate sector is muted, any negative

surprise would push the stock market into a deeper downward correction.

From a technical perspective, we are still not in a hurry to get bullish. While the medium-term trend is positive, a fall below the recent swing low at

5,477 would be a major cause of concern. Investors may use a SIP kind of approach to buy quality large cap stocks. Equity exposures may be reduced if

the Nifty falls below 5,450.

Kindly direct your attention to the daily chart of the Nifty featured below.

A failure to get past 5,970-6,000 range would suggest that the

short-term trend is still bearish. We are closely watching the

levels at 5,477 and 6,000. A breakout past either of these levels

would set the tone for the next big move in the Nifty.

As far as the individual stock recommendations are concerned,

we cover the outlook for ITC and TCS this week. The outlook

for both these large cap stocks is bullish and we expect a 10-

15% rally from a short-term perspective.

From the daily chart of ITC featured below, it is evident that the stock is in a short-term uptrend. The recovery off crucial support strengthens the bull-

ish case scenario.

We recommend a BUY On ITC with a

stop loss at Rs.319 and target of

Rs.375. The positive view would be

under threat if the stock falls below the

support cum stop loss level at Rs.319.

Investors may reduce or exit their

holdings if the price slips below

Rs.319.

The outlook for TCS is also bullish and

we expect the stock to rally to Rs.1,750.

Kindly direct your attention to the

daily chart of TCS featured in the next

page. (Continued on page 4 . . . )

Volume 5, Issue 07

The month ahead - Equity recommendations

B. Krishna Kumar


Volume 5, Issue 07

www.fundsindia.com/smartsolutions?utm_source=FIemailcapital


The stock has been bounced off the crucial support and has managed to edge above the resistance level on July 4. This is a positive sign and we expect

the price to head to the target of Rs.1,750. The positive view would be under threat if the stock falls below the stop loss level at Rs.1,320.

Mr. B. Krishna Kumar also hosts a weekly webinar that discusses the mar-

ket outlook for the following week.

You can register for the webinar by clicking here:

https://www4.gotomeeting.com/register/927617871

Volume 5, Issue 07

Often investors believe it is in their best interest to withdraw from the equity market during market volatility. For example, in 2008

many investors decided to stop their systematic investment plans (SIPs) as the CNX Nifty fell by over 50%. Similarly, when the market

began to recover in 2012 (gained 28%) following the over-24% decline in 2011, most investors chose to book profits; this is evident

from the net outflow of Rs 15,160 cr from equity funds in the nine months ending February 2013. The month of March saw inflows

worth Rs.768 cr, though in April investors resorted back to profit booking with the net outflow for the month being Rs.270 cr.

This lack of confidence in long-term investment in the equity market mostly arises from lack of awareness, which clearly highlights the

need to inform investors that equity is an asset class where one needs to be invested for longer periods (over seven years) to get superi-

or returns. The equity market represented by the CNX Nifty has given around 19% returns in the 10-year period ended March 28, 2013

compared with 2-3% in the 3-5 year period.

While 2012 was a positive year for equity markets (CNX Nifty up by 28%) led by positive global cues and steps introduced by the gov-

ernment since September 2012 on reform measures. Equity markets may not be able to deliver very big returns in 2013 like in 2012.

Further equity markets are expected to remain volatile due to political (pre-election period) and economic reasons (high current ac-

count and fiscal deficits & low growth).

On the debt front, interest rates appear to have peaked out and the Reserve Bank of India (RBI) is expected to cut interest rates further

(after the 25 bps cuts each in January, March and May 2013) in the next six months.

At this juncture, to prevent any one asset class from having a negative impact on returns, it is prudent to look at a diversified portfolio

Balanced funds: The best of both worlds

Nimesh Shah - MD & CEO ICICI Prudential AMC Limited


Volume 5, Issue 07

comprising equity and debt. Balanced funds provide an asset allocation which is about two-thirds (over 65%) invested in equities and

one-third in debt. These funds offer a reasonable opportunity to participate in equities at relatively lower risks and generate better risk

adjusted returns from both equity and debt components. The funds are also actively managed - exposure to equity is increased if the

equity market is positive (see chart below).

Balanced Funds’ Equity Exposure – Tactically Aligned with Equity Market

Note – Average monthly equity exposure of balanced funds, category as per CRISIL Mutual Fund Ranking of De-cember 2012 Increase /decrease in equity exposure is a combination of strategic change in allocation and mark to market

movement

Performance of balanced funds

Balanced funds of ICICI Mutual for have outperformed the CNX Nifty across most of the time frames analysed (one, three, five and

seven years) mainly due to their diversification to debt which has cushioned the fall in equities. Further, ICICI Prudential Balanced

Fund has outperformed the broad benchmark as well as the category average across all periods. In the 10-year period until March 28,

2013, the scheme has given 19.07% annualised returns compared with 18.95% for CNX Nifty.

(Continued on page 6. . . )

Advantages

1) Diversification - Spreading one’s investment across asset classes helps to reduce the market risks and moderate the effect of

any individual asset class on the portfolio’s value. Table 3 shows that when the equity market was down 24% in 2011, balanced

funds fell by less than 15% as these benefitted from exposure to debt, but when the market rose 28% in 2012, balanced funds gave

almost similar returns as pure equity funds. This clearly indicates the downside risk protection provided by the category.

2) Asset allocation is automatic and tactical – If one were to hold separate equity and debt portfolios, managing these could

be a tedious task and would involve churning costs and tax implications; further, one may not be able to tactically adjust equity allo-

cation as per market movement. Fund managers, on the other hand, are better placed to take a tactical call based on market move-

ments. Balanced funds provide all these advantages in a single structure.

3) Tax benefits – Balanced funds have an average 65% exposure to equities, which allow them to be taxed like equity funds. These

funds enjoy tax-free returns if the holding period is greater than one year; otherwise, they are subject to short-term capital gains tax

except for the dividend option. Dividends paid and received are tax free (without any dividend distribution tax) irrespective of the

holding period. For


Volume 5, Issue 07

Suitability

Balanced funds are ideal for investors with a moderate risk profile and an investment horizon of over three years. Lower volatility and

tax benefits similar to equity funds make these funds a good investment option for such investors. The fund manager’s ability to re-

balance the equity and debt allocation as well as take tactical calls on the equity allocation based on market cycles helps investors as

investors need not maintain equity and debt portfolios separately.

This is noticeable as balanced funds on an average returned 27% in 2012, marginally lower than the 28% gains in CNX Nifty mainly

because of the higher equity allocation in balanced funds

One must, however, conduct due diligence before any kind of investing.

(The author is MD & CEO of ICICI Prudential AMC Limited)

Financial planning Education - Insurance

S.Shridharan —Head - Financial Planning

What is insurance?

Securing your family's well-being is one of the most important goals of life. An insurance protection plan helps you secure your loved one's future

against life's uncertainties. An untimely death can cause a major setback to your family - both emotionally as well as financially, especially if you are the

sole breadwinner. You can purchase an insurance policy at an extremely nominal cost.

Anyone can fall sick anytime. You'll probably have to sacrifice a dream or compromise a fund you have saved for something else. That's where health

insurance steps in, so that one can have access to the best health care, without fearing financial strain. It is this guaranteed peace of mind that helps

"take the fear out of faces."

It becomes necessary to evaluate a human life in terms of money in order to avoid problems caused by under-insurance. Human Life Value (HLV) of an

earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the

earning member.

How to calculate HLV?

HLV can be calculated in two different ways.

Income Replacement method

Need Analysis method

Income Replacement method

For example, if your income is Rs. 600,000 per annum. We will negate the self expenses.

This could vary from person-to-person. We will consider around 20% as one’s self ex-

penses. The family needs Rs.480,000/- for their regular expenses. In this case, we need

to have a corpus of Rs.80,00,000 as fixed deposit which provides an interest of 6% per

annum. In this case, the insurance requirement is Rs.80,00,000 presuming there is no

existing insurance and no investments made earlier. The same would be less if you have

already taken any insurance or any financial investments made.

We will see the need analysis method of calculation in the next series.

Mr. S. Sridharan is the Head of Financial Planning with FundsIndia. You can reach Mr. Sridharan at [email protected]


The first tranche of much-awaited Inflation Indexed Bonds (IIBs), announced in Budget 2013, is out. Named as New Inflation Indexed

Government Stock 2023, they were launched by the RBI on June 4, 2013 with a maturity of 10 years and 1.44 per cent as real rate of cou-

pon per year.

The primary motive behind the move is to provide people an alternative to gold as a safe haven against inflation.

The principal will be adjusted with the Wholesale Price Index (WPI) and paid at the end of 10 years. The calculation for interest to be paid

and adjusted principal will be done after every 6 months. The WPI will be used with a lag of 4 months; for example, January 2013 WPI will

be taken as reference WPI for June 1, 2013. Meanwhile, the coupon will be paid on the re-adjusted principal every 6 months.

But the biggest dampener for these bonds is taking the WPI as a reference and not the Consumer Price Index (CPI) which is the clearer

reflector of inflation at the ground level.

Too little too late?

Generally, high growth periods are accompanied by higher inflation. Over

the last 10 years, India’s GDP growth rate averaged nearly 8 per cent and

even the WPI has averaged nearly 6 per cent. But of late, the growth rate has

slowed down and so has the inflation; albeit somewhat. With WPI expected

to ease further, the return from IIBs might not be significant.

Had these bonds been around over the last 10 years, our study has found out

that even the worst performing actively-managed large-cap or large- and mid

-cap fund has returned more than twice than this. Also, the return of an aver-

age liquid fund is just a tad lower.

Significantly, these do not offer any additional tax concessions to the investor either.

Investors need to pay tax depending upon the tax brackets their incomes fall in. On

maturity, however, the investor can avail the indexation benefits, which is 10 per cent

without indexation or 20 per cent with indexation, whichever is lower.

Syndicated from Value Research Online—Article can be viewed online here—http://

www.valueresearchonline.com/story/h2_storyview.asp?str=23138

Volume 5, Issue 07

Wealth India Financial Services Pvt. Ltd., H.M. Centre, Second Floor,

29, Nungambakkam High Road, Nungambakkam,

Chennai - 600 034

Phone: 044-4344 3100 Email: [email protected]

IIBs Flatter, Only to Deceive

Research Desk—Value Research Online | Jun 28, 2013

Capital letter July'13 - Fundsindia

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